IRS clarifies production tax credit language

The Internal Revenue Service has addressed some unanswered questions that resulted from the extension and modification of the Section 45 renewable electricity production tax credit.

Among several biofuels industry tax credits extended in the American Taxpayer Relief Act of 2012 were provisions that allow biomass facilities to continue to qualify for renewable energy production tax credits (PTC), but vague language in the bill prompted clarification from the Internal Revenue Service and U.S. Treasury.

The modified tax bill alters the date by which a renewable energy facility can qualify for a PTC; instead of having to begin producing energy by a “placed-in-service” date of Dec. 31, 2013, new facilities can become eligible for the credits based on the date they begin construction. The new deadline is Jan 1, 2014. When issued, however, the act did not specify what criteria will need to be met in order to be considered to have begun construction.

On April 15, the IRS finally released a notice describing two methods a qualifying taxpayer may use, one of which is beginning of starting physical work of a significant nature. Both on-site and off-site work—performed either by the taxpayer or by another person under a binding written contract—may be taken into account for purposes of demonstrating that physical work of a significant nature has begun. “For example, in the case of a facility for the production of electricity from a wind turbine, on-site physical work of a significant nature begins with the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation,” states the notice. “If the facility’s wind turbines and tower units are to be assembled on-site from components manufactured off-site by a person other than the taxpayer and delivered to the site, physical work of a significant nature begins when the manufacture of the components begins at the off-site location, but only if the manufacturer’s work is done pursuant to a binding written contract and these components are not held in the manufacturer’s inventory.”

The IRS said it will closely scrutinize a facility, which it may consider as non-qualifying if it does not maintain a continuous program of construction, which is also defined in the notice.

The other way to meet the construction deadline is through safe harbor, meaning that a taxpayer pays or incurs five percent or more of the total cost of the facility, and makes continuous efforts to advance towards completion of the facility. Facts and circumstances indicating continuous efforts to advance towards completion of the facility may include, but are not limited to paying or incurring additional amounts included in the total cost of the facility; entering into binding written contracts for components or future work on construction of the facility; obtaining necessary permits; and performing physical work of a significant nature. Disruptions to continuous efforts that are out of the taxpayers hands, such as natural disasters, severe weather conditions and licensing and permitting delays, will not be considered as indicating that a taxpayer has failed to make continuous construction efforts.